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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: capital gains when you short Date: 7/15/1999 7:32 PM
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[[Again, I'm not positive about this. But I think is the strategy known as shorting
against the box, and I think the long term holding rules say, in effect, that this
time period doesn't count towards long term capital gains, so it doesn't work as
a way to lock in gains while waiting for them to age - the gains are locked in, but
they don't age.]]

Basically correct. Ignoring the ISO issues for a second, and just looking at the "short against the box" issues, shorting will lock in the gain, but will NOT help you as far as holding period.

If your "long" position is short term when you "short/box", then it will always remain short term while the hedge is open. When you sell the "short" position, if you decide to keep your "long" position, it'll still be a short term gain...even if you held the original "long" position for more than a year (when including the "short/box" position.

Does this make any sense? I'll try an example.

You buy 100 shares of XYZ at $10/share on January 10, 1998. On December 1, 1998, the price of XYZ is $90/share. So you borrow a separate 100 shares from your broker, and sell them short. A classic "short agains the box" move.

On December 25, 1999 you sell your short position. Because the long position that you originally had was short term at the time of the "hedge", the gain or loss on the short sale will also be short term...regardless of how long you held the "short" open. In this example, you held the short position for over a year, but any gain or loss would be short term.

If you turned around and also sold your long position on December 25, 1999, any gain or loss would also be short term...because your holding period was short term when you initiated your "hedge" position. If you decided...for whatever reason...that you wanted to hold on to your "long" position, your NEW holding period would begin on December 25, 1999...when you closed your "hedge". You do NOT get to tack on the 11 months that you originally held the shares (prior to your hedge) to your "new" long position. Your holding period begins all over again on the date that you closed your "hedge" position.

Make any more sense? If not, please ask. You can read more about this issue in IRS Publication 550 at the IRS web site.

TMF Taxes
Roy
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